The United Kingdom (UK) and Singapore held the 7th UK-Singapore Financial Dialogue in Singapore today. Both countries renewed their commitment to deepening the UK-Singapore Financial Partnership that was agreed in 2021, discussed mutual priorities such as sustainable finance, FinTech and innovation, and agreed on further cooperation in these areas.
"Is the Block Chain a Solution Looking for a Problem?" – Keynote Remarks by Ravi Menon, Managing Director, Monetary Authority of Singapore at CordaDay Singapore 2019 on 7 March 2019
Ladies and gentlemen, good morning. And to all our foreign guests, welcome to Singapore.
I am delighted that R3 is holding CordaDay 2019 in Singapore.
- We have representatives from almost a hundred of the world’s largest financial institutions and corporates gathered here today.
- I guess if it is a conference about blockchains, nobody wants to miss out.
A Much Misunderstood Technology
The blockchain is one of the most misunderstood technologies in recent times.
The first misconception about the blockchain is that it is all about crypto currencies or tokens.
- The blockchain is not only, or even mostly, about crypto currencies or tokens.
- The blockchain is essentially a technology to establish consensus in a decentralised system.
- It allows diverse entities to collaborate and execute transactions without trusted central parties. It does this by recording and sharing data across all the nodes of the blockchain network so that everyone in the network can see and verify the data.
- The crypto token is an economic incentive to encourage miners to perform the computational work required to keep the network running. This is important for public networks, but may not be required in private consortium networks.
The second misconception is that the blockchain is inadequate for enterprise usage: that it is slow, inefficient, and scales poorly.
- Indeed, the first generation blockchains that relied on proof-of-work consensus among unidentified parties suffered from these drawbacks.
- But today, most of the use cases are for business-to-business transactions using private, permissioned blockchain networks.
- In networks of known participants, governed by agreements that are enforceable in the physical world, consensus models are being developed that are faster, more efficient, and more scalable.
- The purists may quibble that these new generation networks do not meet all the characteristics of a blockchain. But what matters is what works and what the use cases are.
The third misconception is that blockchain technology is a “solution looking for a problem” : that there is no business value for the use of the blockchain.
- It is true that we have yet to see any live large-scale industry use of the blockchain despite countless proofs-of-concept and experiments.
- But it is easy to forget that developing a live industry application often takes years even using mature technology and conventional infrastructure.
- Whether we will eventually have large-scale applications of the blockchain remains to be seen.
- But unlike some other technologies that are pursued mostly in the laboratory for primary research, blockchain technology is mostly use-case driven: there is almost always a real problem to be solved.
But I would be remiss if I also did not acknowledge a fourth misconception about the blockchain – this one coming from the opposite direction: “the blockchain is the solution for all kinds of problems”.
- At last year’s Singapore FinTech Festival, Mr Narendra Modi, Prime Minister of India, jested that “if you want investors to empty their pockets, tell them that you are using blockchain!”
- Unfortunately, there is a tinge of truth to the joke.
- Share prices of companies have been known to shoot up after they renamed themselves to include the term “blockchain”.
- Many start-ups are pitching that they are “blockchain-enabled” without an inkling of what a blockchain is.
- The hype around the blockchain has resulted in somewhat indiscriminate funding.
While the blockchain holds promise as a solution for some of industry’s big problems, it is not a solution for every problem.
- Yes, blockchain technology has matured in its capability to support many use cases.
- But we should not equate capability with suitability. Many use-cases are likely better served by well-designed centralised systems. They don’t need a blockchain.
The blockchain is most suitable in scenarios where
- it is important to know the histories of ownership;
- multi party coordination is required; and
- there is no trusted central party or reliance on the central party is inefficient.
Let me now highlight two use case experiments from the Singapore financial sector where blockchain technology is being applied with good prospects:
- clearing and settlement of payments and assets; and
- trade and trade finance.
Clearing and Settlement of Payments and Assets: Project Ubin
Clearing and settlement of payments and securities is one of the big pain points in the financial industry. The problem statement is this:
- In a real-time gross settlement payment system, transactions typically go through a single trusted party, often the central bank.
- The challenge MAS posed itself was: can we create a more efficient inter-bank payment and settlement system without MAS acting as the trusted party?
Thus began Project Ubin in 2016 - a collaborative effort among MAS, the Singapore Exchange, ten banks, eight technology companies, and six academic institutions.
Phase 1 of Project Ubin successfully demonstrated that banks are able to transact with one another on an Ethereum-based prototype without going through the MAS.
- MAS issued a digital representation of the Singapore Dollar – a central bank digital currency – and placed it on the distributed ledger for domestic inter-bank settlement.
Phase 2 of Project Ubin successfully achieved decentralised netting of payments in a manner that preserved transactional privacy, using three different blockchain platforms.
- This was a key milestone because it demonstrated for the first time that the blockchain was capable of supporting the critical features of a payment system.
Phase 3 of Project Ubin, completed last year, demonstrated that tokenised digital currencies and securities assets on different blockchain networks could be simultaneously exchanged, reducing risks for transacting parties.
- The model can be applied to any form of tokenised assets, including physical assets where property titles or ownerships are recorded on a blockchain platform.
We are now in Phase 4 of Project Ubin - to extend the application to cross-border payment and settlement. This is where the real pain point is and the potential payoff highest.
- Cross-border payments today rely on a correspondent banking network.
- Banks hold balances with one another and settlement occurs through the adjustment of these relative balances.
- There is counterparty risk, liquidity is split, and reconciliation is a major pain point.
- In cases where multiple correspondent banks are involved, transactions may take days and at high cost to customers.
In Phase 4, we have linked up Project Ubin with Project Jasper by Bank of Canada, to test out possible models of cross-border, cross-currency payments across two different blockchain platforms.
- If successful, this will help bring about significant improvements in efficiency, cost, speed, and risk management in cross-border payments.
- The technical work has been completed, and we will publish the project report – our fifth Project Ubin report – in a few weeks’ time.
The grand vision in the payment and settlement space is a blockchain based system that allows 24/7 cross-border transactions that can be settled in close to real-time.
Trade and Trade Finance: TradeTrust and Global Trade Connectivity Network
Trade is another area where there are a large number and variety of parties involved.
- There are customs and port authorities; importers and consignees; carriers, freight forwarders, banks and insurers – in many cases, potentially 40 or more parties involved in the value chain of a trade transaction.
- This highly fragmented network – if you could call it that - results in slow, manual and cumbersome processes.
The blockchain could potentially link up the different parties and facilitate the flow of information across the trade value chain. What are the tangible benefits?
- Automating the manual processes of verifying trade documents will help to reduce fraud risks and duplicate invoicing while improving operational efficiency.
- Visibility on orders, transactions, and movement of goods will help financial institutions make better credit assessments for trade finance.
- With validated information on trade receivables, it could also allow companies to secure working capital loans at better rates.
Given the complexity of trade networks, blockchain experiments in this space have tended to focus on single use-cases.
- But the real network benefits can be reaped when there is consolidation across use-cases, sectors, and ultimately jurisdictions.
- Strong public-partnerships among government agencies, port authorities, logistics and supply chain companies, and financial institutions will be critical in driving adoption in the trade space.
Singapore’s TradeTrust project is a step forward in the digitisation of paper-based trade documents using blockchain technology.
- TradeTrust is led by the Info-communications and Media Development Authority (IMDA), in partnership with Maritime and Port Authority of Singapore, and is supported by Singapore Customs and the Singapore Shipping Association.
- The replacement of paper-based documents with electronic documents verified on the blockchain will improve the flow of trusted data across transacting parties and enable increased automation of trade processes.
- This will not only improve the efficiency of the trading and logistics sectors, but also create opportunity for the financial sector, especially in cross-border trade finance.
The key to unlocking this value lies in the ability to operate across jurisdictions and across platforms.
- MAS is working with the Hong Kong Monetary Authority (HKMA) to develop the Global Trade Connectivity Network as a cross-border infrastructure to digitalise and facilitate trade and trade finance.
- As banks are plugged into the network, documentary trade finance could become more digitised, and securing of trade finance could become faster, more efficient and transparent.
This audience needs little persuasion on the potential of blockchain technology. If anything, my plea to you is pick a viable use-case with deep economic or social impact and work towards bringing it to life.
And as one of the leading blockchain centres in the world, Singapore is a great place where you can collaborate, experiment, and scale.
- We have a strong pool of talent and expertise within the blockchain ecosystem.
- MAS, as the central bank and financial regulator, is committed to partnering you on this journey.
I wish you the best. Thank you.